Market Returns

What market returns can novice investors expect?

This article will show broad market returns for stock and bond investments.

Two previous topics in this series — Investment Novices - Financial Illiteracy and The Arithmetic of Wealth should be read prior to this topic.

Market Returns — Stocks

Stocks generally produce higher returns than bonds. But they also produce larger losses. To investigate stock returns, we will look at a broad index of US stocks. VTSMX, the Vanguard Total Stock Market Index, will be used to illustrate stocks.

This mutual fund is from Vanguard, a company that pioneered low-cost diversification via mutual funds. Vanguard is a highly respected company and offers a wide variety of mutual funds and also Exchange Traded Funds (ETFs). For now, we ignore the distinction between mutual funds and ETFs. There are other companies that offer families of funds that compete with Vanguard, e.g. Fidelity, T. Rowe Price, and several others. Comparable funds from these different families generally produce similar results.

Image One shows what investing $10,000 in 1994 into VTSMX, produced:

(Click on image to enlarge)

Stock Returns

The $10,000 initial investment grew to $85,000 over this 25-year period, a compound annual growth rate (CAGR) of almost 9% per year. This return is similar to the returns shown in the tables in The Arithmetic of Wealth. It is slightly lower than the 10% used in prior examples.

The important point is that no stock market expertise was required to buy (and hold) this one fund. This observation is important for those who believe they know nothing about the stock market.

The recently deceased John Bogle, the founder of Vanguard, made it possible for anyone to achieve these results, even a monkey. Other mutual funds have done the same.

Stock Risk

A closer look at the results should create concern. While we may be pleased with the almost 9% compounded rate of return, the pattern of returns is troublesome.

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